France Tries to Save AAA Grade

In Possible Electoral Suicide France Gets More Austerity

The French government is going all out to preserve France's AAA bond rating. It might ensure its electoral defeat.

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Amiel Ungar, 11/11/11 01:19

Nicolas Sarkozy

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President Nicolas Sarkozi has more important matters on his mind than the embarrassment of an open mike betraying his conversation with Barack Obama.

The French president is up for reelection in half a year and he is leading up to the campaign with austerity measures. These includes hikes in VAT, advancing the implementation of postponing the retirement age from 60 to 62 and a higher Corporation tax.

The measures have been prompted by the anemic growth rate of the French economy where 1% growth now seems an impossible dream. As a result, government income has to be revised downwards. France is already running a 5.7% deficit when the permissible euro standard is 3% a standard that the French have long flouted.

And As the example of Italy across the border has proven, countries that were once considered too big to fail have been caught up by the general European panic and by the downgrades of the rating agencies. The same fate awaits France.

Therefore the AAA rating awarded French debt has become the French financial Verdun position that must be held at all costs. If the AAA rating is breached, it will probably constitute the coup de grace to the French president's hopes for reelection. The government is counting on the maturity of the French voter in accepting the bitter medicine:

“We have only one goal: to protect the French people from the serious difficulties that many European countries are now facing. Our citizens are now aware of the risks to our livelihoods and futures caused by deficits and debt.”

This is a tricky strategy and may be suitable for other political cultures where an electorate can respect the government for taking unpopular measures that will reap rewards in the long run. In France it may backfire.

It also leaves the government open to a riposte by the Socialist opposition that is saying, where have you been up to now, that currently make you need to cobble up and present an incoherent package to rein in the deficit.

It is also an indictment of the poor growth rate. Then, of course, the Socialists can combine ideology with partisan politics by claiming that corporations and the rich should assume primary responsibility in balancing the budget while accusing the government of benefiting these sectors by tax breaks.

So far the European countries that have implemented austerity have not seen a turnaround in their fiscal fortunes because they have failed to generate growth. Even if France proved an exception it is hard to see the situation improving noticeably within half a year to persuade the voters to give Sarkozy a second chance.